Question

Ritz​ Products's materials​ manager, Tej​ Dhakar, must determine whether to make or buy a new semiconductor for the wrist TV that the firm is about to produce.

1 million units are expected to be produced over the life cycle. If the product is​ made, start-up and production costs of the make decision total

​$2 ​million, with a probability of 0.5 that the product will be satisfactory and a 0.5 probability that it will not. If the product is not​ satisfactory, the firm will have to reevaluate the decision. If the decision is​ reevaluated, the choice will be whether to spend another ​$2 million to redesign the semiconductor or to purchase. Likelihood of success the second time that the make decision is made is 0.8. If the second make decision also​ fails, the firm must purchase. Regardless of when the purchase takes​ place, Dhakar's best judgment of cost is that Ritz will pay

​$0.40 for each purchased semiconductor plus​ $1 million in vendor development cost.

​a) Assuming that Ritz must have the semiconductor​ (stopping or doing without is not a viable​ option), what is the best​ decision?

The firm should:

a) buy

b) make

the semiconductors because this decision has an expected cost of

​$__________

Maximum amount that could be spent _________

Minimum amount _________